Concern about food price volatility is closely connected to the concept of food security, i.e., its four pillars of food availability, economic and physical access to food, food utilization, and stability (vulnerability and shocks) over time (FAO 1996, 2015). The slow progress in reducing hunger and malnutrition and the role of volatile agricultural markets in the food crises of 2007/2008 and 2010 fueled concerns about the stability and reliability of the global food system. This book, however, emphasizes that the abovementioned four dimensions of the food security concept should be viewed not only as four separate building blocks but also as a system of complex dynamic interactions. Price shock-related food and nutrition insecurity may undermine the resilience of poor people and low-income countries and thus exacerbate economic insecurity, often eroding societal cohesion.

Food policy is a sensitive political issue, and it is becoming increasingly so as the world becomes more urbanized with increased concentrations of political voice near power centers. Moreover, food policy is affected by strong normative beliefs not only about goals—like food security—but also about instruments to achieve these goals. Recommendations about how to deal with volatility need to consider the specific policy context (Pinstrup-Andersen 2015). When food prices rise, the power of political leaders may become contested. Rising onion prices changed election outcomes in India.

Increasing food prices caused thousands of protesters to take the streets of Port au Prince (in 2008) and Algiers (in 2011). Rising food prices led the Haitian prime minister to resign from office in April 2008 and fueled the protests for a political change in several Arab countries. The 2007/2008 crisis also generated social and political turmoil in Bangladesh, Côte d’Ivoire, Egypt, Indonesia, Uzbekistan, and Yemen. Several other countries saw violent food riots, demonstrations, or social unrest as a result of rising food prices.

Beyond the anecdotal evidence and the correlation between international prices, excessive price spikes, and food riots depicted in Fig.1.14, recent empirical research suggests a causal relationship between food prices and social unrest (Bellemare 2015). Many governments of developing countries are held responsible for ensuring a certain degree of food security and decent living conditions. When these basic requirements are eroded, governments could quickly lose their legitimacy, and unrests and protests could arise especially in urban areas, where coordinating a collective protest action is easy. Thus, the scope of the protests could also broaden and trigger the demand for deeper institutional and political reforms (Costello et al. 2015).

As food prices are a sensitive political issue, it is not surprising that governments and the G20 aim to quickly respond to increasing prices. Much of this response has been only partly effective—or it even contributed to increasing volatility elsewhere [see Martin and Anderson (2012) for the case of trade policies]. This is partly based on a collective action failure to coordinate policies such that they re-enforce rather than neutralize each other. On the other hand, increasing integration of local agricultural markets into global markets and of agricultural markets into broader financial asset markets makes it more difficult to identify the causes of extreme events. The traditional agricultural supply and demand fundamentals seem to have only little explanatory power for recent price movements. Energy prices and biofuel demand, interest rates and monetary policy, financial investments and speculation, sudden trade restriction, or lack of information are some of the factors which are considered to be important determinants of agricultural markets in recent times.

Without a proper understanding of the causal relations, excessive volatility cannot be reduced effectively. This book presents research on these causal relationships, their relevance, and policy implications to provide better information base for political decision makers at the national and international level.
(…)

Implications for Policymaking

The main policy message of this book is volatility matters, and there is a lot which can be done about it. Volatility matters because volatile food prices are closely linked with the stability dimension of food and nutrition security. Extreme price shocks are associated with insufficient micro- and macronutrient intake, which negatively affects health and mortality and impedes the physiological and cognitive development of children (Black et al. 2013). Undernutrition, in turn, reduces labor productivity and economic growth. The risk of future price shocks reduces investments in agricultural production, which has negative long-run impacts on food supply. Volatile food prices increase political risks which could induce governments to adopt ill-designed ad hoc market interventions.

Volatility did not only matter in 2007/2008 and 2010 at the global level, but it is also still a highly relevant issue today at regional and country level, despite declining global food prices. Many of the underlying structural problems leading to volatile agricultural markets since 2007 have not been properly addressed. Emerging risks from other domains—extreme weather events due to climate change, conflicts and political instabilities in the Middle East and Africa, and the ongoing use of expansive monetary policy leading to low interest rates—could lead to new sudden extreme events. The international community and many governments have yet to develop an effective risk management strategy to be well prepared for future crises.

Based on the analysis and evidence of this book, policymakers can address the problem of volatility with three major strategies:
1. Policies to reduce excessive volatility: embracing open trade, flexible bioenergy policies, grain reserves, and regulation of commodity markets
2. Social protection and nutrition policies to alleviate chronic and acute undernourishment; insurance markets
3. Redesigning international institutional arrangements and organizations for food security to address collective action failures

For policymaking, it is not about choosing one of the policy instruments proposed here, but rather a portfolio of policies that best addresses the relevant issues. The weights of such a portfolio will be context dependent: Countries with high administrative capacity, for example, could rely more on social protection, while others may opt for rule-based storage policies. In any case, policies between countries and domains need to be coordinated to produce synergy and to avoid any possible offsetting effects.
(…)

Integrating Risk and Volatility into Models with Longer Time Horizons

Integrating a short-term concept like volatility into agricultural and economic equilibrium models with longer time horizons remains a challenge. Volatility is investigated using time series models (with high-frequency data) or rational expectation equilibrium models. Both classes of models can hardly represent global trade flows and trade policies, welfare changes, and (potentially endogenous) long term trends in technological change. Advancing model integration in this direction is important not only for better understanding the impact of market risks on long-term developments but also for properly integrating climate change risks into agricultural economic models.